Reliance-Disney merger: An indepth analysis of what it means for the Indian M&E landscape

Karan Taurani, SVP, Elara Capital, does an indepth analysis of the Reliance Industries, Viacom 18 Media, and The Walt Disney Company’s agreement to form a joint venture. He takes a look at the impact of the merger on India’s M&E ecosystem, the synergy prospects, impact on the OTT space, strength of the sports business, etc. Taurani also highlights a few risks along the way.

Reliance Industries, Viacom 18 Media, and The Walt Disney Company have announced the signing of binding definitive agreements to form a joint venture that will combine the businesses of Viacom18 and Star India. As part of the transaction, the media undertaking of Viacom18 will be merged into Star India Pvt Ltd (SIPL) through a court approved scheme of arrangement. In addition, RIL has agreed to invest at closing Rs 115 billion (~USD 1.4 billion) into the JV for its growth strategy.

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Reliance and Disney announce strategic joint venture

The transaction values the JV at Rs 704 billion (~USD 8.5 billion) on a post-money basis, excluding synergies. Post completion of the above steps, the JV will be controlled by RIL and owned 16.34% by RIL, 46.82% by Viacom18 and 36.84% by Disney. Disney may also contribute certain additional media assets to the JV, subject to regulatory and third-party approvals. The JV will have over 750 million viewers across India and will also cater to the Indian diaspora across the world. The JV will also be granted exclusive rights to distribute Disney films and productions in India, with a license to more than 30,000 Disney content assets, providing a full suite of entertainment options for the Indian consumer.

Impact analysis

Deeper inroads into the Indian M&E ecosystem

The merger of Viacom18 and Star India will have a big impact on the entire M&E ecosystem as the combined entity will command a huge market share. The merger will create a large media juggernaut with 108+ channels (Star India has 70+ TV channels in 8 languages, whereas Viacom has 38 TV channels in 8 languages), two large OTT apps (Jio Cinema and Hotstar) and two film studios (one each of Reliance and Disney India). Large market opportunity (TAM) for the merged company, as India’s M&E market for print, TV and digital is at $18 billion in CY22, poised to post a CAGR of 8.2% over CY22-25 (Source: EY FICCI).

Post the merger, the combined entity will command a TV advertisement/ TV subscription (excluding distributors/ DTH/ MSO revenue)/ Total TV market share of 40%/ 44%/ 42% (as of FY23), respectively. The merged entity is expected to command a digital OTT market share of ~34% in CY23, while the TV viewership share in top 10 channels (according to BARC) is ~40% as of CY23 . The consolidation between RIL and Disney on the India TV side could have a negative impact on other linear TV broadcasters, such as Sun TV, ZEEL, Sony, and others, as they may not be scale up on market share. The merged entity’s focus on maximising market share through increased investments in content, synergies, and enhanced marketing power poses challenges for individual broadcasters to compete and grow. With a large customer base across various genres, including regional genres and Urban GEC, the combined entity aims to dominate key markets, potentially leading to market share loss and challenges for other players, including the possibility of smaller channels shutting down.

Jio Cinema + Disney Hotstar merger - potential negative for global OTT giants

The merger of JioCinema and Hotstar poses a challenge for global OTT platforms, as India’s market values bundling and is price sensitive. The combined entity can offer a comprehensive package, including web series, movies, sports, originals, and a global catalogue. This bundled premium plan, possibly in collaboration with Jio’s large subscriber base, may hinder the ability of global OTT platforms to raise Average Revenue Per User (ARPU).

Better prospects of profitability in the medium to long term

The merger may result in improved profitability for the combined entity as there may be a reduction in employee cost, production cost and marketing costs on the TV side and content costs, particularly on the OTT side, which could contribute to a more sustainable path to profitability over the medium to long term. Currently, both platforms are facing heavy losses due to high content costs, and Jio Cinema relies solely on AVOD without significant paid subscriber revenue. With the combination of Hotstar and JioCinema, the merged entity can enhance its subscription revenue by increasing subscription prices and attracting a larger subscriber base.

Reliance may drive the entire business through Jio Platforms, with a significant influx of ad revenues in digital advertising. The digital advertising market, being a winner-takes-all business, heavily relies on scale. They may also have a pay-based mechanism via Jio Cinema/ Hotstar at a larger scale which will propel healthy subscription revenue over the medium term.

Monopoly in sports properties may lead to higher ad revenues

On the sports front, the merged entity is set to become monopolistic, with Disney and Jio collectively controlling approximately ~75-80% of the Indian sports market across both linear TV and digital platforms. This dominance in sports, primarily cricket, positions them to command a substantial share of the overall ad market, showcasing strong growth in an industry where sports is a key driver of viewership on both linear TV and digital platforms. In CY22, sports adex (TV+Digital) in India stood at Rs 71 billion (according to GroupM) out of which Disney India had a contribution of ~80%. The combined entity will have lucrative sports properties like Indian Premier League (both TV and digital), ICC cricket tournaments (both TV and digital), Wimbledon, Pro Kabaddi League, BCCI domestic cricket, etc.

Telco customer retention and bundling

Telecom companies have used OTT as a value-add to retain/ gain subscribers. And OTT companies piggyback on telecom plays to scale up their subscriber base – TSPs (telecom service providers) have larger access to a wide variety of customers. With the vast content library of Jio and Disney, the merged entity’s content, spanning 1) international movies, 2) web series, 3) sports content, and 4) catch-up TV content, could prove advantageous for Jio subscribers and make it a one-stop content hub.

There might be initiatives such as a Jio Prime offering, providing subscribers access to content at an affordable or even free price through last mile resource and 5G wireless access. The company will have a big advantage of last mile with Jio having a subscriber base of more than 450 million smartphone users. This will hit Bharti Airtel as it has tried to tie up with OTT players in the content ecosystem to offer value-add. Thus, Bharti Airtel may have to invest heavily in own content or shape partnerships with global OTT giants such as Netflix and Amazon or other OTT platforms to generate clout in the content ecosystem.

Synergy prospects:

The ad revenue potential from IPL is expected to increase significantly, with the merged entity having exclusive rights (TV+Digital) to IPL. This consolidation may result in bundled advertisement revenues, potentially mitigating the higher cost of IPL rights and reducing overall losses; due to IPL rights being split between TV and digital between two different platforms and digital platform offering IPL free, there was a big dent in the IPL revenues on TV, which could see some respite.
The merger is anticipated to bring about restructuring in employee costs, reduced production expenses, and lower advertisement costs for TV. These potential cost synergies could contribute to improved margins for the merged entity. On the sports side too, content costs may pare sharply for TV, digital over the medium to long term, given that fewer platforms may bid aggressively for expensive properties.
In digital, content cost inflation (content cost for web series 3-5x higher than for TV non-fiction shows, per episode) has been sharper due to heavy fragmentation in the OTT market and entry of global giants with deep pockets. With the merger, content cost in digital may see much lower growth, which may improve the unit economics for the OTT business, potentially resulting in lower EBITDA losses for JioCinema and Hotstar.
Considering the critical role of technological advancements in the success of OTT platforms, the integration of Disney’s technological expertise is expected to enhance the user experience on JioCinema. This improvement may subsequently drive higher subscriber numbers and revenue growth.

The Risks

Since the merged entity will be the biggest player in the Indian TV industry, the merger will require CCI (Competition Commission of India) approval, which may take some time or lead to shut down of channels in case of a big overlap (more within the GEC genre)
Post CCI approval, NCLT (National Company Law Tribunal) approval may take another 8 to 12 months
A below par customer experience on the video apps despite a wide variety of content may not augur well in subscribers paying for the same; global OTT giants like Netflix have a very superior experience to command a premium ARPU
Continuance of hefty losses of the merged entity over the near to medium term due to high costs sports properties (IPL, ICC tournaments & BCCI bilateral rights) could negatively impact valuation prospects for the merged entity

Shareholding pattern of the merged entity

After the merger, the ownership structure of the combined entity will be as follows – Reliance holding 16.34%, Viacom18 owning 46.82%, and Disney possessing 36.84%. Considering Reliance’s stakes in Viacom18 (~60%) and TV18 (~38.4%), it will effectively hold around 46.8%. TV18, Paramount Global, and Bodhi Tree, each with a 13.3% stake in Viacom18, will own 3.8% (excluding Reliance stake), 6.2%, and 6.2%, respectively, in the merged entity.

Valuation

The joint entity, including cash infusion, is valued at Rs 704 billion. This valuation comprises Rs 115 billion in cash, Rs 330 billion for Viacom18, and the remaining Rs 260 billion (~USD 3.2 billion) is the combined valuation of Star India and Hotstar. This valuation of Star India and Hotstar is much lower compared to pre-covid valuation of $14 billion to $15 billion, which may be due to:

Loss of IPL digital rights leading to ~50% ad revenue decline and 40% subscription revenue decline for Hotstar
TV ad revenue remaining flat over FY19-23
Sports content incurring notable losses due to slower revenue growth.

From a valuation standpoint, the impact on TV18 (which owns 13% in Viacom18) is minimal to negative, as the combined entity is expected to generate substantial losses in the near term. Additionally, TV18’s stake in the merged entity is valued at Rs 44 billion, implying a hefty premium for its news business at Rs 66 billion (considering TV18’s overall market cap of Rs 110 billion).